Browsing by Subject "Finance"

For years, policymakers debated on whether SMEs face a financing gap. Deliberations became less polarised after banks engaged in deleveraging en masse in the aftermath of the 2007-09 financial crisis. The subsequent economic policy discourse placed greater emphasis on SMEs’ financing needs and their reliance – or overreliance – on bank financing in the EU. Arguably, the reliance at the time illustrated the heavily concentrated banking industry of the EU; a phenomenon partially resultant to the EU’s underdeveloped capital markets. In 2015, the European Commission set forth the Capital Markets Union initiatives, which included a variety of initial policy measures aimed at, inter alia, facilitating SMEs’ access to capital markets. Having yielded limited results, however, these measures are yet to bear fruit – as of 2023, the number of IPOs in the EU is in a declining trend ever since 2007, the financial system of the EU remains largely bank-based and SMEs face similar financing constraints to that of the pre-crisis era, albeit – some may argue – to a lesser extent. The objectives of the paper are threefold. First, to identify regulatory barriers hindering SMEs’ access to traditional financing sources; second, to identify the potential risks that may ensue from relaxing securities regulation; and third, to advance market-based policies that facilitate SMEs’ access to public equity financing. The arguments are as follows. For bank financing, issues predominantly pertain to the supply side and manifest as reduced lending output to SMEs. Whilst multifaceted, one reason for the reduction in lending output is the presence of inherent information asymmetry in SME-creditor relationships. The paper posits that the micro-prudential capital adequacy ratio associates this information asymmetry with heightened credit risk, thereby increasing the risk-weighting of corporate exposures to SMEs, i.e., the denominator in the capital adequacy ratio formula. As a result, banks with SME exposures in their balance sheets face deteriorating capital ratios. On the demand side, hindrance mainly stems from high costs of debt, which appears to be a prima facie causation of the heightened credit risk, as banks seek to shift the cost burden onto SMEs. For equity financing, issues mainly relate to the demand side by virtue of both direct and indirect costs rendering market-based financing unviable for SMEs. These costs derive from transparency requirements enforced in the form of disclosure requirements via the Prospectus Regulation, MAR and, for issuers on SME growth markets, MiFID II. The consensus amongst scholars is that indirect costs are higher than that of direct costs and, based on evidence, indirect costs operate as the greatest deterrent for SMEs to go public. On the supply side, SMEs lack visibility as a result of decreased investment research coverage, ultimately impairing liquidity of SME growth markets. Consequently, the paper argues that the unbundling regime introduced under MiFID II is the root cause for diminishing volumes of investment research, and thus ought to be abolished.